ABSTRACT

The leading explanation for the positive price response surrounding tender offer share repurchase and specially designated
dividend (SDD) announcements is the information signaling hypothesis. This paper reexamines these announcements to determine
if Jensen's free cash‐flow theory also has explanatory power. Lang and Litzenberger's (1989) findings suggest an important
role for the free cash‐flow theory in explaining the market's reaction to dividend changes. In contrast, we find the market's
reaction to share repurchases and SDDs is approximately the same for both high‐Q and low‐Q firms. We thus have an empirical
puzzle: If Jensen's free cash‐flow theory applies to dividend changes, it is difficult to see why it does not also apply to
the analogous events examined here.